Category Archives: Best Practices

Cost Reduction Success Requires More Than a Reverse Auction

As more and more companies have found out over the past few years, it takes more than a well-structured reverse auction to cut costs, especially during a recession. If your organization is not yet a next level supply management organization, here are a few tips to get you on your way.

Understand the Need
The current market environment is to do more, and grow more, but spend less. It’s an economic paradox, but it’s the reality for the time being. As a result, any company that fails to achieve continual cost reductions might find themselves the next victim of the jobless recovery.

Accept the Reality
Despite what South Park might suggest, it is not possible for an entire company to bury its head in the sand to get through some trying times. Nor is it possible to ignore the need for continual cost reductions even if there are no obvious “low hanging fruit” opportunities left to pick.

Negotiation is Not Enough
The days of yelling, table banging, and threatening to take the business elsewhere are long gone. Margins are tight across the board and no supplier is going to risk survival for a customer who may, or may not, be around next year. A moden organization needs a number of tools at their disposal, including good spend analysis and e-Negotiation solutions.

Make The Business Case (to be a Technolgy Ace)
Given the do more but spend less mantra, the C-Suite will probably want Procurement to get by with whatever tools they have now, even if those tools aren’t more powerful than a pencil, paper, and abacus. Fortunately, numerous studies exist documenting the ROI of Spend Analysis and Decision Optimization solutions that prove that these two solutions, on average, each deliver a year-over-year return of over 10% (and are the only e-Sourcing solutions that fall in that category). Thus, if Procurement focusses on Spend Analysis (to identify its most profitable opportunities in the short-term and the long-term) and an e-Negotiation suite that contains Decision Optimization (in addition to modern RFx and e-Auction technology), it has a lot of ammunition.

Focus on Erosion of Savings
Generally, 40% (or more) of negotiated savings in an average organization are never realized due to maverick spending and non-compliance on the part of the supplier. Implement e-Procurement policies and solutions that can ( a) prevent the approval of POs to non-contracted suppliers without appropriate executive sign-off and ( b) automatically m-way match each invoice to goods receipts and purchase orders (verified to be at contracted rates) and prevent payments until all items have been delivered and billed at contracted rates. While not perfect, as there will always be emergencies that require off-contract spend, such a solution will get an average organization from 60% to 90% compliance, and if the negotiated savings was 10%, increase implemented savings by 50%, which is a substantial amount on a multi-million category.

Work as an Interdisciplinary Team
It’s important to work with the joint S&OP team to insure negotiations, and buys, are based on good forecasts and with engineering to not only make sure the raw materials and component parts but to help them, during NPD, select alternate sources of supply that can reduce costs from step one.

Communicate, Communicate, Communicate
Procurement requirements change everyday, and if the organization is buying last year’s materials on last year’s forecasts, one can be sure that opportunities for savings are lost.

McKinsey’s Seven Steps to Better Brainstorming

How do you generate better and more creative ideas for innovation, CI (Continuous Improvement), and BPR (Business Process Re-Engineering)? According to the McKinsey Quarterly, you need “better brainstorming” instead of the familiar brainstorming process where the company brings in an outside moderator who knows little about the business and offers little motivation to the employees who do not think that the session is a good use of time.

This process, that the authors call “brainsteering”, is a more advanced form of brainstorming that requires more preparation, the ability to leverage how people typically think, and the leadership to steer the energy wasted in a typical brainstorming session into a productive direction. The preparation starts with the following seven steps:

  1. Know Your Organization’s Decision Making Criteria
    It’s useless to think outside the box if the organizational policies create boxes that cannot be escaped. Make sure any absolute criteria are known and outlined in advance. This allows participants to avoid wasting time on ideas that will not be accepted and makes for a more productive session.
  2. Ask the Right Questions
    Decades of research has shown that traditional, loosely structured brainstorming techniques, are inferior to approaches that provide (some) structure. One of the best techniques is to use (well-designed) questions as the platform for idea generation. The “right” questions, of which there should be about one per person, are those that force participants to take a new, unfamiliar perspective while still limiting the conceptual space the team will explore (to the organizational box of the first step).
  3. Choose the Right People
    Specifically, pick people, with “in the trenches” knowledge, who can likely answer the questions you’re asking. Don’t bring an MBA to help you with CI on the NPD process for electronic component design.
  4. Divide and Conquer
    Conduct multiple, discreet, highly-focused idea generation sessions among subgroups of 3-5 people that focus on a single question, or a small set of related questions, being sure to isolate “idea crushers” in their own subgroup. This will ensure that everyone speaks up and contributes.
  5. On Your Mark, Get Set, Go!
    Before you break the participants into subgroups and set them off, take the time to clearly explain your expectations, which revolve around a deeper consideration of key questions than traditional brainstorming sessions. Explain that, given the restrictions, a group may only generate two or three worthy ideas and that any ideas outside the scope of the current discussion should be written down and saved for the appropriate time.
  6. Wrap it Up
    While each subgroup should share all of its leading ideas with the entire group to motivate and inspire participants, the group shouldn’t pick a winner. Since the participants won’t always have the executive-level or subject matter expert understanding of the criteria and considerations that must go into prioritizing ideas, picking winners is not a fruitful exercise. Instead, describe what steps the organization will use to pick the winners and how, and when, the winning ideas will be announced.
  7. Follow Up Quickly
    Decisions and announcements should be quick and thorough. Team members won’t be demoralized if their idea wasn’t chosen, instead, their morale will be increased when they get feedback as to why the winner was picked that they can use to generate better ideas next time.

Some of these steps contain some good advice, and the McKinsey Quarterly article on “seven steps to better brainstorming” contains some great examples. Check it out.

Benefits of Coopetition

As this recent HBR post on how to “make your competition work for you”, even if you are afraid that your allies will steal your business, in today’s economy, a creative collaboration with your biggest competitor may be the best opportunity for revenue and survival.

They key to survival is coopetition — finding a way to partner with your competitor in such a way that both parties can substantially benefit from their shared resources without stealing customers or damaging credibility. While easier said than done, there are advantages.

  • Best of Both Creates New Markets
    If your strengths differ from your competitor’s strengths in a complementary way, a strategic combination of your solutions can win in a new segment of the market which neither of you could enter.
  • Economies of Scale
    If companies work togehter on business segments where they can minimize costs but not jeopardize unique attributes, they can share costs and economies of scale.
  • Opportunities for Upsell
    If a customer would benefit by having another product that you sell, or that your competitor sells, there will be an opportunity to upsell the customer at a later time.
  • Integration for Critical Mass
    If your competitor has a product your customer base also wants, it can help you get critical mass a lot faster.
  • Cross-Endorsement
    If your competitor isn’t directly competing with your market, then you can refer business to each other without losing customers.
  • Potential Investor
    Once credibility and value has been established, a strategic partnership can extend to a financial relationship. They could have the finances you need to launch more NPD. Or a merger could allow for economies of scale that will free up even more money for NPD and marketing.

And once both companies are working in sync, there will be the following benefit:

  • Supply Chain Streamlining
    You can partner on procurement, logistics, and NPD. And, if you’re lucky, you can conquer your space like Apple conquered theirs through a best-in-class supply chain.

Is There Enough CI in your NPD?

Considering that the final cost of a new product is often more-or-less determined in the first 10% of the design cycle, you need the best New Product Design (NPD) process you can get. One way to get this is through the application of a Continuous Improvement (CI) Initiative to your NPD process. Through the application of value-stream mapping, you can identify activities in the process that don’t add value to the customer’s perspective. Anything that adds more resources or slows the process down without adding value needs to be scrapped.

The best NPD process is one that includes supply chain and strategic suppliers who can come up with alternative designs that use low-cost raw materials and cost-efficient manufacturing processes. And, if the organization is lucky, a lean transformation will occur and the effort will prevent design creep from adding features and functions the organization’s customers are not willing to pay for. So take advantage of the “unexplored opportunity”. It will be worth it.

How Can the NHS Find 50% More Savings?

A recent article over on the BBC News site notes that NHS hospitals [have been] told to seek 50% more savings by a regulator. A number of factors are being blamed for the target, including greater-than-expected inflation, but regardless of the reason, if the NHS doesn’t find savings of at least 6% to 7% a year, it could be in trouble, as it needs to make up to Twenty Billion Pounds of efficiency savings by 2015 to reinvest in care.

So how can the NHS find more savings without sacrificing services, with wait times that are already at a 3-year high, even further?

The obvious answers are:

  • streamline the supply chain and
  • improved GPO performance for prescription and specialized equipment buys

but the real answer is probably:

  • stop buying like a government agency!

I’m not as familiar with the UK buying rules as I am with the Canadian buying rules, but many jurisdictions within North America, the UK, and Australia / New Zealand have the following rules that do nothing but increase cost, decrease efficiency, and put quality of product and service in jeopardy:

  • bids over some random amount must be public and go to the lowest bidder,
  • you must be on a standing offer before you can bid, and/or
  • past performance cannot be used as a determining factor in the award decision.

Let’s take these one by one:

Bids over some random amount must be public and go to the lowest bidder.
Whoever thought this was fair and/or efficient is a moron. While it makes sense to allow any vendor who can competently provide the service to bid, letting every vendor, and his little dog too, bid is ludicrous. What happens is you get consulting organizations with no appropriate skills whatsoever putting in bids in the hope of getting more work, who, if they get the bid, will then flail madly to hire whomever is available to throw on the project. Half of these people will be unsuited for the job and they’ll have no experience working at a team. Furthermore, many organizations that subsist on government projects have mastered the art of the “change order”. They’ll agree to do “X” where “X” sounds like it is what you want, but really isn’t, and then to get what you really want, because of the tight contract, you’ll have to pay a ridiculous amount in change order fees, and the result is that the net cost will be more than the highest bid, and significantly more than the lowest bid from a competent, honest, vendor.

You must be on a standing offer before you can bid.
This generally takes a lot of time and effort, and is not a good use of time for most private organizations as standing offers only allow you to get no-bid work for an amount not worth it for the effort, or bid for projects you might not get. Proper procurement practice should be to put out a call for participation specific to a project, and then qualify organizations who can bid, not force an inefficient process that wastes nothing but time and money.

Past performance cannot be used as a determining factor.
This is my favorite. Whomever thought this was fair is a complete idiot. How is it fair to penalize competent vendors again and again by allowing an incompetent vendor to repeatedly bid, and, if the low-bid rule is in place, win projects that everyone knows the vendor cannot do at that price point. All that happens is that millions of dollars of public money gets wasted. How is that fair?

So if the NHS really needs to increase savings drastically, my advice would be to identify any buying practices that were inspired by government procurement, and not the private sector, and axe them.